Regional LNG: Experts skeptical about China's ambitious natural gas plans

With the international price of natural gas rising and the market tightening, energy industry insiders are skeptical about China's ability to dramatically increase imports as well as the consumption of liquefied natural gas (LNG, Interfax reported.

"Prices are rising on all fronts, casting a cloud over the LNG market," said Chi Guojing, Secretary General of the China Gas Association at the China LNG conference in Beijing on Monday.

Already, some generators feel the price of gas from the West-East Pipeline (WEP), which delivers LNG from Xinjiang in the northwest to the eastern coast of China, is intolerable, and the CNOOC price for imported LNG is even higher, said Chi.

High international prices have led many to say it is a sellers' market. Supplies for LNG will be tight for the next few years, said James MacTaggart, Deputy General Manager of the Tokyo Branch of SLMS S-II LNG.

Gas consumption is expected to rise from 40b cu m today to 100b cu m by the end of the Eleventh Five Year Plan period (2006-2010). Annual gas consumption will rise from 3% to 6%-8% of China's total energy demand, according to the National Development and Reform Commission (NDRC).

Nearly half of the new demand in China will be met by imports.

Imports from southeastern Asia, Australia and the Middle East will account for a third of national consumption by 2010, according to China Securities Journal. However, the reliability of these import channels may be in doubt.

Large scale importation of LNG from Indonesia is scheduled to begin in 2006, but Indonesia has not been able to fulfill its contract with South Korea, and the country recently contacted energy companies in the Middle East in search of energy supplies, said Mohamed Al Fadhil, the Marketing Manager for Oman LNG.

China has been negotiating rights to import LNG from the Gorgon project, a site about 130 km offshore of western Australia. Proven reserves have reached 365b cu m, with predicted reserves in the larger area at over 11.4 trillion cu m. However, this site will be supplying South Korea and Japan, as well as China. China has not yet signed a contract or set figures for LNG shipments from the site.

Earlier this month, rumors that CNOOC had pulled out of negotiations all together were quickly denied by company representatives.

Furthermore, China has a problem with payment security and reliability, said Fadhil, meaning that Middle East producers favor supplying India. Even with the same payment risks, they still prefer India because it is closer.

Meanwhile, gas fields being developed in the East China Sea are disputed by Japan. Chinese warships were recently sighted in the area as the Japanese company Teikoku Corporation prepares test drilling.

China faced problems in securing deliveries of gas and arranging sufficient shipping capacity, and there are even worries that there were not enough contractors to complete all the LNG import terminals on time, said MacTaggart.

Only six of the LNG stations will be constructed, predicted Fadhil.

China is trying to replace coal generation facilities with cleaner burning natural gas power plants near cities. Shanghai is phasing out coal consumption in the city and replacing it with natural gas while Beijing has already converted its winter heating system to natural gas.

China's western regions are already suffering from gas shortages, because all the local gas is being shipped to the east, said Gao Shixian, Director of the Energy Economics & Development Strategy at the Energy Research Institute, NDRC, said The possibility exists of extracting and liquefying gas from small and marginal sites. Building a pipeline would not be economically feasible, but the LNG can be transported by truck to power generators to meet local demand.

In May of this year, China contract signed a contract with Iran to import 188m tons of LNG over the next 25 years.(*)